Earnings Call: Q2 2016

Jul 18, 2016

Thank you, and welcome to the presentation of Sandvik's results for the Q2 and 2016. With me here on the stage today, I have actually Sjoerd Johan Rosendlier, our CEO and Thomas Eliason, our CFO. They will run through the presentation and after which we'll open up for a question and answer session. And without further ado, I ask you to please go ahead with the presentation. Thank you, Andrew. Welcome to this quarter, quarter 2 report. With me here today, I have Thomas, who will help me to do some number crunching as well as answer some of your questions. I think the Q1 was pretty much in line with our expectations and the targets to make Sandvik a more profitable company. The markets continue to be challenging. And also this quarter, we saw the currency going against us. And despite that, I think we managed to deliver 13.4%, which we are very pleased with. The organic growth was minus 4%, both for orders as well as invoicing. We start comparing ourselves with a little bit easier quarter going forward. I think the first half year twenty fifteen was the most challenging period. Also during this quarter, we had the Capital Market Day where we presented the strategy going forward and some of the changes that we are doing. And to summarize that, we are consolidating the 5 business areas into 3 business areas. We have identified what we call nonstrategic operations. We are going towards more decentralized structure and decision making in the current. And we also have launched the new group targets. We'll come back to all of these a little bit forward. We have also, earlier today, announced that we have signed an agreement with a company called Kobi Capture, a deputy company, who be the way we'll be divesting the mining system too. We'll come back to that a little bit later. I mentioned that we are moving into a so called decentralized operations. That means actually moving the decision making down in operation closer to our customers to make sure that we can respond to our customers' demands much quicker. It is nothing new in Sandvik. I think previous, if you go back in time, Sandvik is coming from a decentralized operation, and this has been well received in all our units out there. The difference from previous is that we are actually moving the responsibility even further down from the businesses to what we call product areas, PAs. And under there, we also have a number of business units. So today, we have 17 product areas with full balance sheet and profit loss responsibility. We also set up the financial targets, and we are going actually from a business cycle into a 3 year target. And the reason for this is that we feel a little bit unsure how good the markets will be during the coming years. And for us, it's important to focus on profit improvements in operations even though the markets are not too generous. So our objective is to, during the next 3 years, deliver 7% improved EBIT margin per year. And we are moving towards our objective to make Sandvik a 15% EBIT margin company. At the same time, we, of course, also want to improve our return on capital employed. And during the 3 year period, the objective is to improve it with 3 percentages. You all know that we have had or we have a strained balance sheet, and our ambition is to get our gearing down. We will continue to do that. And we have a dividend policy, which is generous, and we are planning to continue with that. So if we look at the different markets, I have to press many times, but maybe come here, here. We can see that there's not so much change in the different markets. Europe continued to be flat on a good level, steady level. And I would say probably that East Europe is a little bit stronger than the Western part. Also, Germany shows strength. North America, I think, Asia is an improvement here. You saw we had a negative during previous quarter, and now it's plus 5% on Asia. To be mentioned here is that China is still negative at 4%. North America is probably the area where we are seeing that the market is the toughest at the moment, and we don't see any recovery at the moment. So it's down 10%. There are, of course, segments in U. S. Or in North America where we see good development, and that is in the aviation. And still, the automotive industry is very strong. So we're looking at the different segments. What we are pleased to see is that the mining industry is stabilizing. That's good. We see also strong, as I mentioned, automotive and in aviation. Construction is also pretty steady, while we see the biggest challenges in the oil and gas industry, which is not in the test range. The oil price has stabilized just below $50 but so far, we don't see any big movements in the investment climate. On the general engineering side, it is challenging, especially in North America. And as we talked about before, there is a very strong relation by General Engineering and the oil and gas industry. As I think we also mentioned before is that we are not seeing that the number of drill rigs in North America is declining rather coming back a little bit. So far, it doesn't really see to be seen in our numbers, but still a little bit in the right direction. Looking at both our orders and our revenues, we saw that we can see that the organic growth is minus 4% for both of them, and the currency effect is about 5%. But what you can see on the order received here on the chart is that the last four quarters are pretty flat. So we are not going down. It's actually flattening out here on that side. Moving over to the EBIT development. And I've mentioned 13.3%, and index is actually down 9% compared to last year. But if you look at the currency effect, it's about 1.1%. So if you add that on, we would end up at 14.4%. So I think by that, we feel that this is very strong numbers. This is very much driven by many of the projects we have, both when it comes to the back end on the supply chain optimization program, where the project is moving according to plan. But there is also a lot of initiatives when it comes to sales and administration costs in all our operating entities, and that will continue going forward. So if we look into the our 5 different businesses, starting up with Machining Solutions, I think this is the strongest result of the business unit. I think represented a good report. We can see organically, they are flat at the moment, but and also currency that was against them with 0.7%. Despite that, 21.8 percent EBIT margin, which I think is very good. Good is also to see that the net working capital is very stable, and they produce a very strong cash flow for the group. So that is moving in a good direction. On the mining side, the margins are here pretty much in line with our expectation. And I think the positive side is here that we see an improvement on the equipment side. I think that's positive. And also the aftermarket is stapling out, which is also good. You should know that we are comparing this quarter, which is a flat quarter compared to previous year, with a very strong one last year. So it's good numbers in that way. Mining and Construction, as you know, are merging at the moment, and there's a lot of focus today to getting the new 5 product areas up and or sorry, 8 product areas up and running. And the management is in place, and I think it's moving very much in a good direction. Also, Machia Technology shows stable profit levels, 8.8%. If you take away the metal surcharges, it's SEK 8.5 million. They were a little bit positive by SEK 9,000,000 this year. On the organic growth, it was down minus SEK 8,000,000, minus SEK 6,000,000. If you actually take out the surcharges out of that, it's pretty flat. It's minus 2 and minus 1, so pretty much. We had a great order from China on from the nuclear industry, which we were very happy with. We have, as you know, big expectations from the nuclear industry in China. We had a small cancellation or actually a re prioritization from the umbilical side, more focused on some of the bigger orders that we had there. Otherwise, I think this was pretty much what we expected. On the construction side, I think you probably realize that the numbers were a little bit weaker than the expectations. But in the EBIT numbers, we have taken a number of provisions, I think around EUR 40,000,000 at the moment, which is in relation to the merge into the mining business. And what we are actually making sure that the construction they are moving into mining is clean at the moment. So if you would add that on, we are just under 4%, which is not different from previous quarter. We can also see that organically, we're down 13%. But we should know that last year, we received a large order from Australia, the tunneling order. So if you exclude that, it's about minus 6%. Net working capital continues to work favorably going forward. And then the last one, and that's probably the last time we talked about venture, that is also pretty much line in your expectation. The oil intake is minus 10% year over year. And here, we know that there are 2 businesses which is pretty much related to the oil and gas industry, and that is Varelo Drilling and Completion, as we call it today. That is now being moved into the mining operations. And the other one is Hyperion, part of that, the diamond part of that business, which is a little bit under pressure. At the same time, I think they did a good quarter. Also, processing systems, which is one of the companies that will be divested, had very good orders at the quarter. And then the Nautilus business, the Volta Business will be merged into the SMS business, had also very solid numbers during the quarter. With that, I let you talk a little bit about the numbers. Okay. Thanks, Bjorn, and good afternoon, everybody. So let's immediately go to the financial summary. Top line, as you heard, minus 4% organically, both on the orders and revenues currency effect, minus 5% both on orders and revenues. And then we do have capital of very small acquisitions, but they're so small, so they're not significant. That will be the effect of numbers. So all in all, minus 9% on orders and minus 8% on revenues. The margin, 13.3 percent, euros 2,700,000,000 in earnings, down a bit from previous year, but not bad considering the currency headwinds and the volume drop that we do have with 4%. Working capital, 28% compared to 29% of the revenues last year. So an improvement, although sequentially, it is a bit up, which, of course, impacts the cash flow, which you see on the next line. Cash flow is lower than last year. We'll come back to that in a minute. The return on capital employed, 11%. Now let me say that for those of you who attended the Capital Markets Day, you heard us talk about the new financial targets going from 14% to 17% in return on capital employed. So what is this 11%? Well, the 11% is as reported. The financial targets excludes all the one offs, and we're still carrying with us one off costs from 2015 in this return number. But that would be gone when the year is over, then it goes up a couple of percentage units. Okay. Let's move to the bridge. And the 3 biggest impacts are, as usual, organic growth, savings programs and currency. We have more numbers on the next page. But on this page here, we can talk a little bit about the savings programs, euros 214,000,000 in the quarter. We have now reached €1,500,000,000 in installed savings of the €2,100,000,000 euros that we will achieve at the end of 2017. There's €600,000,000 to go. There will be a substantial chunk of that in the second half of twenty sixteen and then a couple of SEK 100,000,000 in 2017, and then there will be mathematical spillover to 2018 of around SEK 100,000,000 So let's look at the numbers in the bridge, including top line as well. And in the first column here, you see price, volume or organic development, including the savings. So 4% on the top line means €637,000,000 down. And the EBIT effect is flat, but it's actually a little bit positive, including the savings. So this means that we have 50 basis points accretion to the EBIT margin from the organic part of the business. Currency, of course, 5%, EUR 1,0.65,000,000 on the top line. And the currency effect is €391,000,000 So that's a dilution of 1.1 percentage units, as Bjorn said here just a moment ago. So quite substantial. And then structure 1 offs, alloys, charge surcharges, net price effects, etcetera, etcetera. Take that out, you have another 50 basis points. So from SEK 13.4 0.3percent. And here are the components. Okay. Let's talk a bit about working capital. Working capital on the left hand side here, 28 percent compared to 29% a year ago. Although sequentially, it is up a bit. And if you look at the right hand side, you can see how the businesses are developing, where mining is improving, construction is improving, and machine solutions is flattish and materials technology is up a bit. And it's very important to say here that we don't have an inventory issue. Inventories are down all over the place. Accounts receivables are down. Payables go a little bit in the wrong direction. But the biggest impact here is actually advances from customers. We don't have as much advances this year within Materials Technology as we had last year. And that, of course, has an impact. But the summary of that thing is that inventories are going down for all businesses and for the whole company. Right. Cash flow, euros 2,000,000,000 compared to euros 2,700,000,000 a year ago. This is cash flow before financial items, taxes and acquisitions. And as you can see on the table on the right hand side, of course, we make less money. We have a decline organically. We basically keep the margin. But as we have a volume decline, of course, in absolute terms, we have less cash. Working capital is up a bit, and CapEx investments are down or improving. So all in all, euros 2,000,000,000 compared to euros 2,700,000,000 24% down. The net debt continues to go down year over year. There is always a pickup in Q2, as you can see on the chart here, and that's because we have a dividend in the Q2. Gearing is around 1.0. And the target of getting 2.8% in gearing is The guidance. If you look at the 2nd quarter, we guided EUR 500,000,000 in negative currency impact, transaction and translation. We end up on CHF391. Metal prices, we said minus CHF 50,000,000 but we stopped at +9. For the Q3, we guide with the currency rates we have today, or as it may be yesterday. End of June. End of June. That's right. So oops, it's clear itself. We said minus €100,000,000 The metal price effect is expected to be plus €30,000,000 The full year, we haven't done any changes on the outlook at all. So we saw CapEx, 4 point less than EUR 4,100,000,000. The financial items or the finance net, somewhere between EUR 1,700,000,000 and EUR 1,900,000,000. But if we would say something here, it's maybe more closer to 1.7% and 1.9%. So it's moving in the right direction. And the tax rate, somewhere between 26 percent 28%. Okay. Now just a few words on Brexit. We got a lot of questions on this one, of course, and I'm sure we will get more questions on it. So let's do a bit preemptive in and give you the basic facts. So really 2 issues here. Do we have an impact on the currency flows on the British pound, the depreciation? And how big is the United Kingdom in our business. Let's start with the size of the business. 2015, we had sales of 3,800,000,000 And of course, it's the 4th largest market that we have. So if we had a downturn in the U. K. Economy, of course, it impacts us. But SEK 3,800,000,000 around 5% of the total company. The net assets invested in the companies that we have is EUR 3,700,000. We have 11 production sites, 8 sales units and around 1400 employees. The currency flows match actually. So the short and long positions on the British pumps are more or less exactly the same. So this means that we don't have an impact short term or an immediate impact on the currency flows regardless of where the pound goes. So the conclusion is that, as I mentioned, no immediate currency impact, but the U. K. Is still an important market for us. And you see the numbers. And we don't disclose margins by country, but we can do our own assumptions here. And with that, I'll hand over to Maniyan for the future. Thank you so much. And I will end up with talking a little bit about the structure. As I mentioned, Sandvik is from my perspective, about 28 operating entities, 17 product areas and 10 business units, each of them with full responsibility for the P and L and the balance sheet. These all different operations, their performance varies from being extremely successful, stable and profitable to be less and need more improvements. The important thing is that each of these business units or product areas, they need to have their strategic agenda. And we follow the curve, stability, profitability before growth. That means some of the units, they need to stabilize their business, make sure that there will be no surprises. The next step is to improve the possibility to the right level. And when the unit is profitable and stable, then it's time to focus from for growth. So this means that all our 27 operating entities needs to focus on continuous improvements. So if all our operating units continue to improve, Sandvik will become a more profitable company, and we'll be able to reach our target to reach the 15% EBIT in the next 3 years. I think we end there, and then we are open for question and answers. Yes. Let's go straight to the questions. In the thesis, are there any questions in the hall here in Stockholm? No, no questions here. Then operator, could you please get through the first question on the conference call, please? Thank you. Our Our first question comes from Guillermo Konya of UBS. Go ahead sir. Your line is open. Thanks everyone and good afternoon. I wanted to ask 2 questions. First, obviously, about Machine Solutions and whether you could actually quantify the stocking effect and the additional base effect on the margins, if at all? And then maybe a second question on SMT, on Materials Technology. The invoicing continues to be very strong and well taken away Q1 last quarter, I guess, all impact trails below invoicing. So I wonder whether we should see actually an erosion in terms of revenues going into the second half of twenty sixteen? Thank you. Thank you. Let's talk about the stocking effect in SMS. There is a small increase in inventory, which actually is near collectible. So it has a very, very limited effect on the EBIT margin on SMS. The little bit working up in inventory is much related to deliveries that will be seasonal and will be done during the summer period. But there is more or less no effect, maybe 0.1% or something like that, but not more. On the S and T part, there we saw that pretty good invoicing in that's correct. We do we are a little bit optimistic that we should be able to continue to see a reasonable development during the second half. We'll be seeing that. There are a lot of exciting areas within S and T. It is related to Iran, it's one part. The nuclear is very exciting, and we also see some small improvement in some parts in the primary business. So we are carefully optimistic that we should be see a reasonable second half of the year when it comes to orders in SMT. At the same time, they are taking the activities that we talked about during the Capital Market Day to make sure that the costs are related to the revenues. And this business is a longer distance between orders and deliveries, which gives us also reasonable time to take action if needed. But so far, I think it's a moving reasonable growth. Thank you. Can I just check that the number of extra days doesn't have an impact on margins? I think that should be the case, right? I think we had 2 days in 2 days in the quarter. And that does not impact the margins. It's just basically revenues and orders. That's all? Correct. Thank you so much. Thank you. Operator, can we have the next question, please? Thank you. Our next question comes from Charles Bergland. Go ahead sir. Your line is open. It's Klas from Citi. A couple of questions, please. Firstly, starting on Mining. Demand is up slightly quarter on quarter versus flat last quarter. Does this also mean that pricing has improved? I'm thinking about consumables here where price pressure has been a key feature over the last 12 months. Atlas is talking about better consumables this quarter. I just want to understand the change in pricing as well. No. I would say the challenge hasn't really changed anything from previous quarter. There is correctly on the consumables some pressure on the pricing side. That is correct. While we see, of course, a little bit more stable in the rest of the aftermarket business, the service and the spare parts as well as on the equipment. Okay. And then my second question is on SMS and General Engineering. Last quarter, you were down slightly quarter on quarter. Now it looks more stable. It seems like Europe and Asia are the main drivers. North America is still weak. Can you give us some color on China within Asia there? You still say that Asia is down year over year, but how did China develop sequentially and by end market, please? Yes. If you look at China, the positive in China is automotive that is developing positively as well as the aviation side. Otherwise, it's down about 4% in China. SMS is also down in China, I think, with 4% during the quarter, while we see an uptick in the Bakio in the mining side, which was otherwise, I would say that no big changes if you look insufficiently. Okay. My final question, promise to be brief, is margin in SMS. It's 22.4 percent, you know, currency in production. This is the highest margin since the peak in 2012. So I'm trying to understand this. Is this the extra cost for the product launches that are now leveling off? Or is it by the price mix owing to more smart tooling, the sensors? What is the key driver? No. I think it's the projects that are run related to the supply chain optimization program, but also a lot of efforts that have been taken on the S and A cost. And they continue to drive this going forward. So it's not an ending. We will continue to make sure that the operations are in line with the demand in the market. I think they're doing this very successfully, and we will continue that. Thank you, Bjorn. Thank you, Claus. Again, do we have any questions here in Stockholm? No, they're quiet. We'll continue with the conference call, please. Operator? Thank you. Our next question comes from Ben Maslin of Morgan Stanley. Please go ahead, sir. Thank you. Hi, Bjorn, Thomas and C. Bjorn, a question on mining, please, and the improvement in demand orders that we've seen sequentially. Has that been driven by any specific product lines or commodities? I know you've given it geographically, but how does it cut by equipment or the different metal exposures? I mean, it's difficult to say if this is coming. The orders are coming in bigger projects, and you get certain orders at a certain time. If we look at the metal prices, they have gone up during the last months or quarters actually. We didn't see from the beginning any reaction in the market. Later, we're seeing good orders in the end of the quarter, which is very positive there. There are some positive signals, but it's still difficult to say. We are not really sure how sustainable this is, and I think we should probably wait one more quarter to see other development before we make any to a quick conclusion on the demand in the market. We have seen other times when we've been maybe a little bit optimistic about that, and then there comes a week, quarter after that. So but it is encouraging because we need, of course, orders for the product factories to avoid under absorptions in them. And from my perspective, it's encouraging to see that the aftermarket is stabilizing because that is an indication of the how the operations are the mining operations are working. The more they are working and harder, and we have put in a lot of efforts to improve the aftermarket during the last 2 years, and that should be paying off. And then a second one, please, on Materials Technology, where you I think you normally get a 200 to 300 basis points margin drop sequentially in the summer in Q3. Would you expect the same pattern this year? Or would it be lower given that I think the commentary suggests that you were already destocking a little bit in the Q2? Thank you. I mean, this is Sandvik. It becomes weaker during the Q3. I don't think we should expect any other changes. That pattern is not. And that, of course, is related to a number of working days. And many of our operations, not least the SMS business as in SMT, it's very much related to that. Got it. So it will be a little bit softer during the quarter. That's pretty clear. Okay. Many thanks. Thank you. Operator, can we have the next question from the conference call, please? Thank you. Our next question comes from Markus Almore from Kepler Cheuvreux. Go ahead sir. Your line is open. Hi, Markus Almod here. Can I ask continue with the geographical questions, please, but on SMS in particular? So we're seeing an improvement in growth trend in North America in particular, but also in Europe. Can you talk a little bit about if that is just working couple of working days or if there is an improvement in SMS in particular? So that's my first question. Maybe I can answer that. We haven't seen any improvement in North America, rather opposite. I think it's pretty weak. If you look at the automotive industry, I think that is more or less flat now. We don't see any growth in that part. We do believe that it's related to a little bit of the destocking. What we've seen improvement is the automotive in China and Europe. That's any problem. But China was still minus and North America is minus. So it's Europe, which is a strong part of the S and S business. And is North America, is it accelerating or decelerating? Or is it sequentially throughout the quarter pretty steady? And do you have any feeling at all to where the stock levels are with your customers? We would probably say it's a slight down in North America. We do believe that it is related to the destocking in the automotive, but it's difficult to say on exactly what level that is. But now North America is probably the market where we see the biggest challenges. It's not really some big issue. I think this is really a North American issue. Okay. And then if I can just continue on Mining. So there has been a couple of project approvals, some big ones like the Oyu Tolgoi expansion, but also some others. So can you talk a little bit about your feeling in the talks with the customers, the tendering activity and such? And also, we've heard from some of your competitors that there is strong but there's an improving situation in gold, which has become quite important for you. And do you agree with that picture? Or are you seeing something else? Thank you. No, we agree with that. I think gold is important for us. The most important is copper. And copper, as you've probably seen, is down actually quarter over quarter. Gold is up, but yes, we see an increased part on the tendering. It's difficult to see how they will materialize. I think, as I mentioned, we need another quarter to see how that really is. But there is a slight optimism in the market. Okay. Thank you. Thank you, Markus. Can we have the next question, please, to the operator? Sure. Our next question comes from Jose Frolen of Handelsbanken Capital Markets. This is Peter Froden. Hi, Hans, and Thomas. My first question is on S&C, on the umbilical business. You mentioned as a whole that you expect and hope for sort of stable order situation. Could you just update us how the deliveries will look like for the umbilicals? And could you also clarify a bit about that specific umbilical business that you I think you it was on a cancellation or a postponement? That's my first question. Yes. First, when it comes to umbilical, for the year, as we have mentioned, it looks good. I think you're pretty full during the period. What we are working hard is to improve for 2017 and 2018. There are a lot of exciting projects. They have to materialize. That's before. But with a slight small optimism that we have a good chance to do that. Related to the cancellation there, that was actually related to one of the big contracts that we took last quarter. And the customer had to prioritize on the large projects instead of the small ones. So it was not really taking out that part that you just put back in time a little bit. Okay. And then the magnitude here? On the cancellations? Yes. Yes. I think it was totally about SEK 90,000,000. Okay. And my next question, you mentioned the provisions in construction. And I mean now the transformation of the structure of the group is sort of ongoing. Will we see more of this type of provisions when we sort of exit the mine system business when you get these two divisions together and obviously also when you resolve the venture business? I don't I hope not. Of course, I did say that it will never happen. That is it can always happen. But I think we are we feel pretty comfortable at the moment, at least with the merge between construction and mining for this period. But I love it. It's difficult to say. But I think we feel pretty clean moving into that. On the venture side, the different businesses are moved in, bought into SMS. I don't see anything should happen there. And moving into the mining, there should not be anything that feels pretty clean at the moment. When it comes to Mining Systems that we you all know that we announced today the signing of the contract with KOBE, There, there is a capital loss in that part, which is around EUR 800,000,000, but that is going to be booked as noncontinuous operations. It will not affect our operating margins. And this is, of course, not closed yet. So we expect to close this by the end of November. And we have a lot of work to be done during this period. And there can be costs in relation to the sales. Do you want to add on that a little bit, Thomas? Yes. We can elaborate a little bit on that. I mean, the capital loss is estimated to be €800,000,000 You don't know for sure when the closing is like in November, hopefully, but around EUR 800,000,000 in capital loss. And then, of course, there are transaction costs, etcetera. But the transaction costs and some other costs, they are already provided for last year. So that will not impact the P and L going forward. But you don't know that there might be some other costs depending on how it goes, which rolls on a little bit in the future, not significant, but that might be something. But all of that will be accounted for, as Bjorn said, in discontinued operations. So it will not impact our key numbers or ratios. So in curiosity, were the sort of industrial sort of players that were interested in the systems business? And if so, why are you sort of want to be divested to private equity? Is that pure price or loss type of function or? I think it's what we feel important is that there is a future for mining systems. We need to make sure that they can continue to operate because they operate with many of our customers we are also using in the mining business, and we need to have good relations. So most important is that the business continue to have a stable future, and we need to find a player who has been serious and dedicated enough to make sure that this becomes good business. I think that's important. And we the reason why this capital cost is so high because we needed to capitalize the company in a way that it can stand on its own legs in the new structure. That is important. Otherwise, it will be impossible for them to live alone. So this is behind that. There are some restructuring work, and there is some capitalization there, which is needed to be done. And that's what we're putting in. We need to make sure. But we do believe that the buyer is the best buyer that we have found so far. Thank you very much. Thanks a lot. I believe we have one question here from the room in Stockholm. Please on this. Yes, from the Schindler Swerdbank. Just a follow-up on the mining systems. The EUR 600,000,000 cash outlay, is that the capitalization you talked about? Yes. You can take it, yes. Yes. A big part of that is the capitalization. But it's also a bit of restructuring and some purchase price adjustments, etcetera. We can put it like this. What is not a cash flow impact is the book the net value of the assets. And we also have one question having been put through the web, and it regards our view on M and A and whether we see any potential for any near term deals? Exciting with the new structure that we have, we have these 27 entities, and they all are in different places in the development. And as I mentioned during the Capital Market Day that the operations that are both stable and profitable, they should be focusing on growth. And we have quite a lot of these entities in Sandvik, as you probably understand. And they need to focus on growing the business. And you can do it organically as well as through margin acquisitions. And we encourage them to go this direction. So but you need to be stable and profitable before you go for acquisition. So that's just as important. But it will definitely be one important part of the growth of Sandvik in the future. And coming back to the financial targets that we talked about here just half an hour ago or repeated half an hour ago, this is why it's so important for us to improve the gearing in the company from today's 1.0 to 2.8 because we have to create some space in the balance sheet so that we can be a bit more active on M and A for the future because there's not much space today for major acquisitions in the balance sheet. Right. We'll go back to the conference call, please. Operator, can you put through the next question? I can. The next question comes from Lars Wasserman of Barclays. Go ahead. It's Lars from Barclays. Hi, Bjorn, Thomas Hansy. Just a quick one follow-up on Mining Systems. I couldn't hear what Thomas said. Can I just be clear, are you injecting any cash as part of your sale of the systems business? If so, how much? And also, just to be clear, are there any other contingent liabilities, any performance related conditions to the sale, earnouts, etcetera? Yes. On the cash side, yes, we do capitalize the company. And we haven't disclosed, we're not disclosing, I mean, the parts of the deal as such. But the capitalization is the biggest one. And as you probably know also that the company has been making losses during the last time, and we need to put there are some restructuring measures that are being taken to make sure that the company is not losing money. Thanks. If I can just return to SMS, thanks for the update on Brexit. So UK is 5% of group. How much is it for Machining Solutions? And just on your European trading in Machining Solutions, you said earlier, I think on the press call, that Q3 hadn't really been much worse nor much better than Q2. Perhaps you can give us a sense for where the month trading trend has been in Europe through the course of Q2 and what you've seen, if anything, in U. K. In the 3, 4 weeks post Brexit? It's I mean, during this quarter, it's actually only 14 days since the quarter started. So I think it's a little bit early. But we haven't seen any changes in the development than we had seen at the previous quarter. And how big is U. K. In SMS? For SMS? Yes, for SMS, it's EUR 1,400,000,000. Thanks. So pretty similar to the group. Yes. Percentage. In percentage, yes. Thank you very much. We'll continue with the next question from the conference call, please. Thank you. Our next question is from James Moore of Redburn. Your line is open, sir. Please go ahead. Yes, thanks. Hi, everyone. Bjorn, Thomas, Hansi. I'd quite like to touch on 3 topics, if I could. Just on SMS and Europe, you've gone up from 0% to 4% organic order growth. That's quite a big plus. I just wondered if you could perhaps help us a little bit more understand the growth trends, north, south. I know you have quite a big Eastern European and Russian business, and it collapsed a year and a bit ago with the ruble. So I'm imagining maybe Russia is helping that. But could you maybe give me some us some color on the change in growth there? I don't have those numbers at the moment. Maybe Elsie, do you have those numbers? Yes. Thank you. In general, for Europe, you can say that the Eastern parts of Europe has certainly contributed to this extent to the threshold for Europe and Russia, not least, albeit they're clearly, like you alluded to, coming from very low levels. But yes, the Eastern part has certainly been outgrowing the Western part through the quarter. But Western is still positive? Closer to flat than positive, yes. So it's really all the Eastern block? Okay. Yes, they've done well through the quarter. And just within SMS, you talked a bit at the Capital Markets about round tools outgrowing inserts. Maybe that's difficult on a quarterly basis, but is that structural trend continuing at the moment in the quarter? Can you see the difference, size the difference? Is that all for the quarter or a broader question? Really for the quarter, whether that trend continues, that round tools are still outgrowing inserts? Yes. I mean, Aerospace is one of the segments that is doing the strongest. So and that's a it will be an important segment for Rambshol. So I think it's fair to say that the pattern is fairly similar still. Great. And just turning to S and T, if I could. You talked about deferrals back at the Capital Markets Day and orders moving to the right. I just want to be clear, has that trend continued? Or have you actually seen some umbilical business come in that surprised you? There are some interesting possible orders, but I would say it's always too early to say anything before you close them. But there are some, as I mentioned there, I'm a little bit optimistic that there could be. Okay. And just and finally, I'd just like to understand, if I could, on Mining Systems. It looks like you're effectively paying the buyer to offload the business, SEK 500,000,000 plus SEK. And given some are optimistic about being at the bottom of the cycle, me less so, I just wonder why is it that people don't see better option value than that if you're going to capitalize it and restructure it? Yes. We don't go into all the details, but the buyer is, of course, putting in also in this business. But we need to put it at a stage where it can stand on its own legs and that it has a possibility to survive. So we need to do this. And during the period, as you have seen, it's been a struggling business for us, we need to put it in shape, and that's why we need to inject the capital. Correct. Yes. And without going into any details, James, we have, of course, looked at various options. And I mean from a even from a financial point of view or also from a financial point of view, this is the best option. Awesome, Richard. Thank you very much. Thank you, James. Operator, can we have the next question, please? Indeed. The next question comes from Felipe Quinta of Exane. Maybe just to hear the question on my new system. I mean, the so you have the capitalization and then you don't mention the grid price. I understand if the grid price exceed the capitalization or not? That's the first question. Yes. As we said, we don't go into all the details where the capital injection has been or what is the purchase price and so on. So we will not disclose that. But we disclosed that the cash flow effect is 6 100,000,000 and the capital loss is about 800,000,000 in this year. Okay. Just also on a bit on the underperforming business units. They performed for the last 3, 6 months profitability wise as they're a larger drag on group operating profit than they were in 2015? You're talking about Mining Systems or No, no, no. The overall underperforming in the market is highlighted during the Capital Market Day. No, I didn't take the question. He's talking about the bubble chart. The ones on the left hand side, below the zero side. Yes. Okay. Yes. It's your the famous bubbles. The bubble in the one of the big bubbles in the left hand corner was the mining system. That is correct, which is being taken out, that is. We have caused other bubbles in that which is underperforming, where we are putting in other efforts now with their own costs and their own balance sheet is to make sure that they are moving up to the profit area. And what we say, and I come back to that, we do not expect any quantum leap changes. It's always continuous improvement, which is important. And we focus on the businesses where we where there is a market attractiveness and where we believe that Sandvik will contribute to these businesses, that they are part of these three businesses that we are focusing on. Okay. And final question on the elimination line at SEK 220,000,000 in the quarter. It includes negative FX headwind. If we exclude it, it's closer to SEK170 1,000,000 in the quarter. Have you started to put some central cost into divisional areas? And are we now at €150,000,000, €200,000,000 level a quarter? Is it a new normal level? Yes. I think you're referring to the central costs that were lower during the quarter. I think we are putting in a lot of saving efforts on the central part. And there are there have been if you remember what we talked about during the Capital Market Day that we had a certain amount of costs, which is a pretty big one, where we also first transferred it over to the different businesses. We have started to moving some of these costs back to the operations, and that will continue during the whole year. So that's taking place. But when you look at the cost lower cost for the center part, that is a clear cost savings on the center costs for center functions. Okay. But that means that the divisional areas performance is even better than what you show when you compare with Q2-fifteen. But in the saving there, there is a saving also that meant that there's a little bit less distributed costs also over to the businesses. Yes. We have a model where the central costs are allocated to the businesses. So when we're moving them, it doesn't mean that the businesses are taking on more costs. I mean, so they get the resources and the people and the systems and what have you. And then it's up to them, of course, to decide what resources that they need and do not need. And that varies, of course, between the all the different businesses. Yes. So when you look at the business areas and the product areas, it is apples for apples. What we're doing here is that we're giving the power to directly influence the cost as opposed to distributing a big, big chunk of corporate common costs. Okay. Very clear. Thank you. Thank you very much. I believe we'll have a few more questions from the conference call, please. Can you please head through the next one? The next question is from Janus Schmidt of SEB. Go ahead, sir. Your line is open. Yes. Hello. This is Daniel Schmidt from SVB. Good afternoon, everyone. I just wanted to ask you on SMS and the EBIT margin there again. Which really takes a step up in the Q2. If you look at this adjusted for sort of seasonality, how linear should we sort of model this EBIT margin progression? Is this the sort of the floor now going forward? Or is there any sort of specifics in the Q2 numbers that we need to consider looking into the coming quarters years? I think number 1 is we will not start guiding forward to the different operations. So but I would say it is a clean report. So there's nothing extra which has been added on to the S and S business. Where will we end up forward that we will see. They will continue to focus on keeping the costs under control. They still haven't completed the supply chain optimization program. So that will continue. We have a flat development in the volume, so we haven't much help from that during the period, and we had the headwind in the currency. So it's, of course, important to see if we can get some growth in the future. That will, of course, also depend on the development going forward. But that's too early to say. And I think maybe I think part of your question was about a little bit about straight line and seasonality. And of course, there is a strong seasonality in the SMS business because it's immediately dependent on the manufacturing activity worldwide. So when the Western Red Coast is in August, for example, of course, it's not much sales. So you can take 21.8 as a floor and applied for Q3 and Q4 seasonality still there. Yes, yes, absolutely. I understand that. But all right. But would you say that this is anyway is this in line with your expectations that you presented at CMD to make this sort of journey to come to the 15% for the group? Okay. We're not sort of this is still early in that journey, but sort of the SMS performance, is that in line with what you expected? I think SMS probably over delivered slightly, and it's going to be some of the other businesses under delivered slightly compared to the expectation. But I think overall, it's pretty much in line with our expectations. Thank you, Bjorn and Thomas. Thank you, Daniel. Can we have the next question, please, from the conference call? Andy, the next question is from Graham Phillips of Jefferies. Go ahead, sir. Your line is open. Yes, good afternoon. My question is again on SMS margin. Can you talk a little bit about the geographic mix? Because when you look back in the last quarter, there's been a negative contribution to the organic profit bridge coming through in this division. But we've obviously had a positive in the Q2 with slight organic growth. So there's obviously a mix thing going on. And with Europe being stronger, North America down, are margins substantially higher in Europe than North America? The first part I would like to say, if you look at the gross margin, it's pretty steady, I would say, maybe slight up on that part. But I think it's very much related to savings that this is taking place. Okay. So I mean, the savings, again, are they geographically focused? Are they going to continue to I mean, you commented on the seasonality, but within the product areas, again, we just sort of see the EBITDA margin on the bridge for the divisions. But is Aerospace and Defense and Automotive higher margin at an EBIT level? I think if you look at Automotive, it's always been seen as the segment where you had a lot of challenges when it comes to margins. So not really. Okay. And then just moving forward on the new divisional structure, when do you anticipate that we'll have a pro form going backwards? And how long will you provide a pro form a going back? And what sort of level of detail will we get in terms of organic growth and profitability and so on? Yes. It's going to take some time. It's going to take a little bit more than 2 months to review the numbers. And we have the ambition to go out with the press release in September with the historical data on the new structure going back 3 years. 3 years. And will that be quarterly? Or Yes, it will be quarterly so that you can do all your comparisons and trend charts and whatever. Okay. Thanks very much. Thank you. Do we have time for one more question from the conference call? If it's a quick one, please. Okay. And the final question from the conference call is from Matt Fiatsworth of Credit Suisse. Go ahead, sir. Your line is open. Hi, thank you. Just a quick one on the construction business. I just wanted to understand a bit more about the margin there and specifically what part of that business had got worse year over year to results in the 2.3% margin in Q2? 1st year, I think you have to see that the volumes are down if you see year over year. I think that's probably and then you automatically get some under absorptions in the production facilities. But as I mentioned, is that if you really want to compare it with previous quarter, you should be adding back about $40,000,000 in cost that the provision that we have taken during Q2. So if you add that on, you end up between 3.84.0. That's about where the level is of the contraction business at the moment. Okay. And do you should we see any reason as we move into the second half that from that level, it should deteriorate? Is there anything across the regions that concerns you? The new structure is, of course, significantly different from the because now the same production units, they do not split their cost between mining and construction. So if you are, for instance, in surface drilling, it doesn't matter if you go into the mining or construction. You have to make sure that this cost is what you need to put in relation to your revenues. So the management teams will be running their operations. You will have 8 management teams driving that efficiency for the different products. So it means if you have under absorptions or you don't have enough capacity in the factories, you have to adopt that. So that would be very strong focus from each of them. I think it's a little bit early to say on the contract side. I mentioned that before that we I think the organic down we were organically down 13%, which is quite a big number. I think if you list out that order, it's about 6%. If you look where the focus is at the moment or where the best activities is actually in the Nordic region here that Norway and Sweden is a really big construction related to infrastructure and to Taneli. And I think we've been putting in a lot of efforts during the last quarter with both in Finland, in Sweden and in Norway to make sure that we get good stake out of that exciting business that is coming. We will continue to do that focus. Sure. And I know you said I mean mobile crashes at the Capital Markets Day was obviously a focus on turning that business around. Have you started to see any positive effects from what the company has done? It was a pretty tough time for the mobile crushers when it comes to the volumes. That's pretty clear. Okay. Thank you very much. I know we've run out of time. I know there are still questions out there, both on the conference call and on the web. So please feel free to contact us at Investor Relations, and we'll be more than happy to help you. With that said, thank you very much for joining us here today, and we'll give you all a very good summer. Thank you. Thank you.